Improving the Structure of the Code of Ethics for Professional Accountants Phase 1

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1 Exposure Draft December 2015 Comments due: April 18, 2016 International Ethics Standards Board for Accountants Improving the Structure of the Code of Ethics for Professional Accountants Phase 1

2 This Exposure Draft was developed and approved by the International Ethics Standards Board for Accountants (IESBA ). The IESBA is an independent standard-setting board that develops and issues high-quality ethical standards and other pronouncements for professional accountants worldwide. Through its activities, the IESBA develops the Code of Ethics for Professional Accountants, which establishes ethical requirements for professional accountants. The objective of the IESBA is to serve the public interest by setting high-quality ethical standards for professional accountants and by facilitating the convergence of international and national ethical standards, including auditor independence requirements, through the development of a robust, internationally appropriate code of ethics. The structures and processes that support the operations of the IESBA are facilitated by the International Federation of Accountants (IFAC ). Copyright December 2015 by the International Federation of Accountants (IFAC). For copyright, trademark, and permissions information, please see page 92.

3 REQUEST FOR COMMENTS This Exposure Draft, Improving the Structure of the Code of Ethics for Professional Accountants Phase 1, was developed and approved by the International Ethics Standards Board for Accountants (IESBA ). The proposals in this Exposure Draft may be modified in light of comments received before being issued in final form. Comments are requested by April 18, Respondents are asked to submit their comments electronically through the IESBA website, using the Submit a Comment link. Please submit comments in both PDF and Word files. Also, please note that first-time users must register to use this feature. All comments will be considered a matter of public record and will ultimately be posted on the website. Although IESBA prefers that comments are submitted via its website, comments can also be sent to Ken Siong, IESBA Technical Director at This publication may be downloaded from the IESBA website: The approved text is published in the English language. 3

4 CONTENTS EXPLANATORY MEMORANDUM... 5 Page I. Introduction... 5 II. Background... 5 III. Significant Matters... 7 IV. Other Matters V. Project Timetable and Effective Date VI. Guide for Respondents EXPOSURE DRAFT: PROPOSED RESTRUCTURED CODE (SECTIONS ADDRESSED IN PHASE 1) 4

5 EXPLANATORY MEMORANDUM I. Introduction 1. It is in the public interest for the Code of Ethics for Professional Accountants (the Code) to be understandable and usable. In restructuring the Code, the IESBA is aiming to enhance the understandability and usability of the Code, thereby facilitating its adoption, effective implementation, consistent application, and enforcement. 2. This memorandum provides background to, and an explanation of, the proposed international ethics pronouncement International Code of Ethics Standards for Professional Accountants. The IESBA approved the exposure draft (ED) in December II. Background 3. This ED sets out a substantial part of the proposed restructured Code. It responds to input from a variety of stakeholders who suggested restructuring to improve understandability and usability of the Code. Feedback from an IFAC Small and Medium Practices (SMP) Committee (SMPC) survey noted that the biggest barrier faced by SMPs in complying with the Code is fully understanding the requirements of the Code. Some users, especially those whose first language is not English, reported difficulty in understanding the Code because of its complexity of language and construction. Others have commented on difficulties in translating some parts of the Code, and understanding complex and long sentences. The IESBA has also received feedback from some regulators regarding the usability of the Code from the perspective of enforceability. These issues may be impacting adoption and implementation. 4. The IESBA has conducted extensive research and outreach in connection with this project. The findings indicate a broad-based appetite for change. There is widespread support from those providing input for restructuring the Code on a timely basis, with particular interest in raising the visibility of the Code s requirements, clarifying who is responsible for compliance with requirements in particular circumstances, and clarifying the language in the Code. In November 2014, the IESBA issued a consultation paper (CP) to seek input on possible approaches to restructuring the Code and related matters for consideration. These matters included: distinguishing requirements from application material; identification of a firm s or individual professional accountant s responsibility for compliance with requirements in particular circumstances; use of language; and reorganization of the Code. Respondents to the CP included regulators, audit oversight bodies, national standard setters, large and small accounting firms, professional accountancy organizations and individuals. The IESBA is grateful to all who commented on the CP. This memorandum develops the themes raised by CP respondents. 5. The project scope encompasses the entire Code. The IESBA has reviewed all proposed changes for consistency with the objectives of the restructuring. These are to improve the understandability and usability of the Code by restructuring it without changing its meaning, except in limited circumstances where determined necessary by the Board. The IESBA has made significant effort to avoid inadvertent changes in the meaning of the Code. It has also sought to avoid inadvertent reduction in requirements or other weakening of the Code. 6. During the restructuring work, the IESBA identified a number of matters that would involve potential changes outside the scope of the project. The IESBA has noted these matters for further consideration when it develops its next strategy and work plan. 5

6 EXPLANATORY MEMORANDUM Highlights of the Restructuring 7. The highlights of the restructuring include: Increased prominence of the requirement to apply the conceptual framework and comply with the fundamental principles. Requirements distinguished paragraphs identified with R. Application material generally positioned next to the relevant requirements paragraphs identified with A. Increased clarity of responsibility more clearly enabling identification, where relevant, of a firm s responsibilities and, together with firms policies and procedures, the responsibilities of particular professional accountants. Increased clarity of language where possible: simpler and shorter sentences; simplifying complex grammatical structures; increased use of the active voice; avoiding legalistic and archaic terms. 8. Additional aspects of the restructuring are as follows: The addition of a Guide to the Code. Reorganizing the Code as appropriate, to enhance clarity and usability, positioning the Code to take advantage of forthcoming electronic features. Organization of the material into more self-contained sections and subsections: o o Each Section having its own introduction which broadly describes the context, including the threats that may exist, and references the fundamental principles. Revised numbering to facilitate revisions. Independence sections moved to the end of the Code and more sub-headings to facilitate navigation. Definitions section enhanced and presented as a glossary, which also includes descriptions of terms used. A new title for the Code. 9. A mapping table is available to facilitate tracking of the changes from the extant Code to the proposed restructured Code. In addition, to assist review from the restructured Code back, the IESBA has added comments against each paragraph of this ED to explain its derivation, i.e., whether it is from a particular paragraph in the extant Code or new material. 10. The IESBA has placed most definitions and descriptions in the Glossary, including words that were included in the Terms Used Sections in the CP. Descriptions from the Glossary are included in the body of the text and they are marked with a footnote the first time that they occur in a Section. An example of a term that has been included in the Glossary in this way is the term audit where it is defined to include review for the purposes of the independence provisions applicable to audit and review engagements. 1 Certain important concepts have been left in the body of the materials rather than being set out in the Glossary, including the fundamental principles, the conceptual framework 1 Set out in the ED, C1 6

7 EXPLANATORY MEMORANDUM and network firms. The terms for these concepts are included in the Glossary with a cross reference to where they first appear in the restructured Code. 11. This ED comprises the following parts of the proposed restructured Code under the first phase of the project: Table of Contents Guide to the Code (substantially new material) Part A Introduction to the Code and Fundamental Principles (Extant Part A) Part C Professional Accountants in Public Practice (Part of Extant Part B) C1 Independence for Audit and Review Engagements (Extant Section excluding the paragraphs concerning Long Association, Non-assurance Services, Reports that Include a Restriction on Use and Distribution) Glossary 12. Proposed restructured provisions related to the following topics will be exposed as part of the second phase of the project at a future date: Part B Professional Accountants in Business 3 III. Responding to Non-Compliance with Laws and Regulations Parts of C1 referring to: o Long Association o Non-assurance Services o Reports that Include a Restriction on Use and Distribution C2, Independence Other Assurance Engagements 4 Significant Matters Clarifying the Importance of the Conceptual Framework 13. The IESBA is mindful of the importance of the conceptual framework approach. This approach enables professional accountants to address threats to compliance with the fundamental principles regardless of the nature of the particular circumstances, rather than simply focusing on complying with specific requirements. The IESBA has not only retained the conceptual framework approach but also clarified its importance. In addition to including a requirement to apply the conceptual framework at the beginning of each Section, the IESBA has included a sentence in the header to each page of the Code. This is intended to remind professional accountants of the need to apply the conceptual framework in all circumstances Extant Section 290, Independence Audit and Review Engagements Provisions covered under the extant Part C, Phase I project Extant Section 291 7

8 EXPLANATORY MEMORANDUM Refinements to the Code Distinguishing Requirements from Application Material 14. Most respondents to the CP supported the suggestion in the CP to distinguish requirements from application material. This was on the basis that the current structure makes it difficult to identify requirements and may impede compliance and enforcement. However, many respondents who supported distinguishing requirements from application material raised concerns regarding the separation of requirements from application material. In response to these concerns, the IESBA has placed application material as close as possible to the relevant requirements. 15. The Requirements component (described in paragraph 7 of the Guide to the Code) identifies requirements that address the specific threats related to the individual section. The provisions set out in this component are denoted by the word shall. Professional accountants are required to comply with each one of these provisions unless prohibited by law or regulation or an exception is permitted. Application Material 16. The Application Material component (described in paragraphs 8 and 9 of the Guide) provides context to facilitate a proper understanding and application of the requirements in the Code. This component includes inter alia: Guidance on what a requirement means or is intended to cover. Material laying out matters for the professional accountant s consideration in applying the requirements. Examples of procedures, including safeguards, that may be appropriate in the context of the engagement or assignment. 17. The word shall is not used in the Application Material component. Where it is necessary to refer in Application Material to a requirement that is already established in the Requirements component, wording other than the term shall is employed. The IESBA has avoided the use of the present tense in Application Material in relation to actions by the professional accountant. This is to avoid ambiguity as to whether or not there is an obligation on the professional accountant to take the particular actions. Statements referring to actions by professional accountants in Application Material have been drafted to make it clear that there is no intention to create additional requirements. Alternative language has been used to appropriately explain the IESBA s intentions. If there were any shall statements in the extant Code that were determined to be interpretations or examples of the application of a requirement, rather than requirements in their own right, they have been included in an appropriately redrafted form as part of Application Material. Identification of a Firm s or Individual Professional Accountant s Responsibility 18. Most respondents supported reducing the Code s use of the passive voice and retaining the extant Code s reference to ISQC 1 5 to clarify responsibility in the Code. 6 The proposed revisions include reference to ISQC 1 and responsibility in paragraph International Standard on Quality Control 1, Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements As set out in paragraph of the extant Code 8

9 EXPLANATORY MEMORANDUM 19. Some respondents, including a few regulatory respondents, encouraged the IESBA to work with the International Auditing and Assurance Standards Board (IAASB). This was to ensure that any requirements or guidance regarding responsibility included within the Code do not conflict with ISQC 1 or the International Standards on Auditing (ISAs). The IAASB is currently undertaking an initiative to seek stakeholders input on the issues to be addressed in a potential revision of ISQC 1, including the issue of responsibility. Apart from the restructuring changes to the extant Code s responsibility paragraph, 7 the IESBA is deferring further consideration of the matter of responsibility until the outcome of the IAASB s consultation on ISQC 1 is known. Use of Language Improving Readability and Usability for all Users 20. Some users, especially those whose first language is not English, have reported difficulty in understanding the Code. The proposals in this ED have been designed to enhance the readability and clarity of the Code through various means including, where possible: Navigability Using simpler and shorter sentences. Simplifying complex grammatical structures. Adding links from the Glossary to terms which, although defined, are described at greater length within the text of the Code, such as threat. Using the active voice instead of the passive voice. Avoiding repetition of definitions in the body of the text where these are already included in the Glossary. Avoiding legalistic and archaic terms, nuances, and superfluous adjectives. Guide to the Code 21. In response to feedback on the CP, the IESBA has further developed the section How to Use this Code proposed in the CP, and renamed it Guide to the Code. It draws on the material in the extant Preface. The Guide to the Code provides an overview of the Code and covers the following topics: The structure of the Code. The authority statements from the existing Code. How to use the Code. Interaction with other ethics standards at the national level. Sections and Subsections 22. To assist users in navigating the Code, the IESBA has subdivided material into sections and subsections. Sections introduce topics and can have subsections that deal with specific aspects of the topic. For example, the fundamental principles are addressed generally in Section 110. Subsections then discuss the fundamental principles individually. 7 Extant paragraph , ED paragraph

10 EXPLANATORY MEMORANDUM Reordering Extant Parts B and C 23. Respondents to the CP were supportive of reversing the order of extant Parts B 8 and C 9 to allow the independence provisions to be presented at the end. A few respondents also supported the reordering on the basis that extant Part C, which focuses on the application of the conceptual framework to professional accountants in business, might also be relevant to other professional accountants. In the light of the comments received from respondents to the CP, the IESBA has determined to retain the proposed reordering of extant Parts B and C of the Code. Tools 24. The preparation of tools to assist users of the Code will be considered after the Code has been restructured. Possible tools that have been noted for future consideration include: A matrix summarizing the various types of financial relationships for different categories of individual (such as audit team member, immediate family member, close family member, etc.), or entity (i.e., firm or network firm) that might hold such an interest. This matrix would be designed to help users identify more easily which provisions might apply to their particular situations. A summary reference to documentation requirements and application material in the Code. Electronic Code 25. The IESBA believes that the proposals in this ED will help position the Code for further enhancements to navigability. Development of further electronic features to assist navigability will be considered after the Code has been restructured, and may include filtering options and enhancements to the navigability of the current electronic Code. Terms in the Glossary will be electronically linked to the body of the Code. IV. Other Matters Specific References to Network Firms 26. The extant Code 10 establishes a general rule for the meaning of firm where used in extant Section 290 as follows: firm includes network firm, except where otherwise stated. The proposed restructured Code distinguishes network firms from firms. In some instances, distinguishing network firms required clarification of the application of a materiality or significance test to network firms. Title 27. Respondents to the CP suggested various possible titles for the restructured Code. They generally agreed that the labeling and presentation of the section containing the fundamental principles and conceptual framework as a code or standards should reinforce and not detract from the principles-based approach. There was clear support for labeling and presenting independence sections as standards. The IESBA is of the view that the Code would benefit from a new name that emphasizes both the principles-based foundation and the inclusion of specific requirements. With Extant Part B, Professional Accountants in Public Practice Extant Part C, Professional Accountants in Business Paragraph

11 EXPLANATORY MEMORANDUM this in mind, the IESBA proposes that the restructured Code be titled International Code of Ethics Standards for Professional Accountants. V. Project Timetable and Effective Date 28. The IESBA is mindful of the need for appropriate alignment of the timing of issuance of the proposed two Structure EDs (Phases 1 and 2) in relation to the timing of other projects currently in progress. The proposed timing of the sections to be exposed takes account of the expected approval dates for various sections of the Code which are currently under revision or development. For further information, see the IESBA Update, Restructuring the Code of Ethics for Professional Accountants. VI. Guide for Respondents 29. The IESBA welcomes comments on all matters addressed in this ED, but especially those identified in the Request for Specific Comments below. Comments are most helpful when they refer to specific paragraphs, include the reasons for the comments, and, where appropriate, make specific suggestions for any proposed changes to wording. When a respondent agrees with proposals in this ED, it will be helpful for the IESBA to be made aware of this view. 30. As explained in the Background section above, the objectives of the restructuring are to improve the understandability and usability of the Code by restructuring it without changing its meaning, except in limited circumstances where the IESBA considers this necessary. Respondents are asked to distinguish in their responses between comments on the application of the structure and drafting conventions and comments on any changes in meaning. Request for Specific Comments 31. The IESBA welcomes views from respondents on the following matters. Refinements to the Code 1. Do you agree with the proposals, or do you have any suggestions for further improvement to the material in the ED, particularly with regard to: (c) (d) (e) (f) Understandability, including the usefulness of the Guide to the Code? The clarity of the relationship between requirements and application material? The clarity of the principles basis of the Code supported by specific requirements? The clarity of the responsibility of individual accountants and firms for compliance with requirements of the Code in particular circumstances? The clarity of language? The navigability of the Code, including: (i) (ii) (iii) Numbering and layout of the sections; Suggestions for future electronic enhancements; and Suggestions for future tools? 11

12 EXPLANATORY MEMORANDUM (g) The enforceability of the Code? 2. Do you believe the restructuring will enhance the adoption of the Code? 3. Do you believe that the restructuring has changed the meaning of the Code with respect to any particular provisions? If so, please explain why and suggest alternative wording. Other Matters 4. Do you have any comments on the clarity and appropriateness of the term audit continuing to include review for the purposes of the independence standards? 5. Do you have any comments on the clarity and appropriateness of the restructured material in the way that it distinguishes firms and network firms? Title 6. Is the proposed title for the restructured Code appropriate? Request for General Comments 32. In addition to the request for specific comments above, the IESBA is also seeking comments on the matters set out below: (c) Small and Medium Practices (SMPs) The IESBA invites comments regarding the impact of the proposed changes for SMPs. Developing Nations Recognizing that many developing nations have adopted or are in the process of adopting the Code, the IESBA invites respondents from these nations to comment on the proposals, and in particular, on any foreseeable difficulties in applying them in their environment. Translations Recognizing that many respondents may intend to translate the final pronouncement for adoption in their environments, the IESBA welcomes comment on potential translation issues respondents may note in reviewing the proposals. 12

13 PROPOSED RESTRUCTURED CODE (PHASE 1) This ED sets out proposed revisions to the Code developed by the IESBA in the course of its Structure of the Code project. Comment boxes next to the paragraphs identify their source in the extant Code or indicate whether they are new material. The December 2015 ED, Proposed Revisions Pertaining to Safeguards in the Code Phase 1 sets out proposed revisions to the Code developed by the IESBA in the course of its Safeguards project. The Safeguards proposals are included in this ED for reference only, and are shaded in gray. Other paragraphs dealing with safeguards, which may be subject to revision as the Safeguards project continues, are shaded in gray and italicized. Certain sections of the extant Code have been excluded from this ED. They will be addressed in the second phase of the Structure of the Code project. TABLE OF CONTENTS Preface Guide to the Code Part A Introduction to the Code and Fundamental Principles 100 Compliance with the Code 110 The Fundamental Principles 111 Integrity 112 Objectivity 113 Professional Competence and Due Care 114 Confidentiality 115 Professional Behavior 120 The Conceptual Framework [Part B Reserved for Professional Accountants in Business (Sections 200 to 299)] Part C Professional Accountants in Public Practice 300 Application of the Conceptual Framework for Professional Accountants in Public Practice 310 Conflicts of interest 315 [Reserved for Responding to Non-compliance with Laws and Regulations] 320 Professional Appointment 321 Second Opinions 330 Fees and Other Types of Remuneration 340 Gifts and Hospitality 13

14 350 Custody of Client Assets C1 Independence Audit and Review Engagements Sections 400 to Application of Conceptual Framework to Independence for Audits and Reviews 401 Network Firms 402 General Documentation of Independence for Audit and Review Engagements 403 Mergers and Acquisitions 404 Breach of an Independence Provision 410 Fees 411 Compensation and Evaluation Policies 420 Gifts and Hospitality 430 Actual or Threatened Litigation 500 [Reserved for future use] 510 Financial Interests 511 Loans and Guarantees 520 Business Relationships 521 Family and Personal Relationships 522 Recent Service with an Audit Client 523 Serving as a Director or Officer of an Audit Client 524 Employment with an Audit Client 525 Temporary Personnel Assignments 540 [Reserved for Long Association] 600 [Reserved for Non-assurance Services] 700 [Reserved for Future Use] 800 [Reserved for Reports that Include a Restriction on Use and Distribution] C2 [Reserved for Independence Other Assurance Engagements] 900 [Reserved for Independence Other Assurance Engagements] Glossary 14

15 PREFACE The IESBA develops and issues, under its own standard setting authority, the International Code of Ethics Standards for Professional Accountants (the Code), including international independence standards. The Code is for use by professional accountants around the world. The Code is established by IESBA for international application following due process. Comment [IESBA1]: Preface The International Federation of Accountants (IFAC) establishes separate requirements for its member bodies with respect to the Code. 15

16 GUIDE TO THE CODE Purpose of the Code 1. The Code sets out fundamental principles of ethics and standards for professional accountants, reflecting the profession s recognition of its public interest responsibilities. The fundamental principles are: integrity; objectivity; professional competence and due care; confidentiality; and professional behavior. The standards are established by the application of the fundamental principles to specific circumstances. 2. The Code provides a conceptual framework that professional accountants are to apply in order to identify, evaluate and address threats to compliance with the fundamental principles. 3. In the case of audits, reviews and other assurance engagements, the Code sets out international independence standards established by the application of the fundamental principle of objectivity to these engagements. How the Code is Structured 4. The Code contains this Guide, the following three Parts and a Glossary: Part A Introduction to the Code and Fundamental Principles, which includes the fundamental principles and the conceptual framework, and is applicable to all professional accountants. Part B Professional Accountants in Business, which is applicable to professional accountants in business, which include professional accountants employed, engaged or contracted in an executive or non-executive capacity in, for example: Comment [IESBA2]: 100.1, Comment [IESBA4]: Comment [IESBA5]: New paragraph Comment [IESBA6]: Comment [IESBA7]: Comment [IESBA8]: o o o o o Commerce, industry or service. The public sector. Education. The not-for-profit sector. Regulatory or professional bodies. Professional accountants in public practice might also find Part B relevant to their particular circumstances. Part C Professional Accountants in Public Practice, which is applicable to professional accountants in a firm that provides professional services and the firms in which they practice. Part C includes requirements for all accountants in public practice. It also includes the international independence standards: o o C1 Independence Audit and Review Engagements, applicable to professional accountants in public practice who perform audits and reviews. C2 Independence Other Assurance Engagements, applicable to professional accountants in public practice who provide assurance services other than audits and reviews. Each part of the Code contains sections which introduce topics. Sections might have subsections dealing with specific aspects of the topic. Comment [IESBA9]: Comment [IESBA10]: New paragraph Comment [IESBA11]: New paragraph Comment [IESBA12]: New paragraph 16

17 The Glossary applies to the entire Code and contains defined terms (together with additional explanations where appropriate) and terms which have a specific meaning in certain parts of the Code. For example, as noted in the Glossary, in C1 audit is used to refer to both audit and review engagements. 5. The content within each of the sections of the Code is, where appropriate, structured as follows: Comment [IESBA13]: New paragraph Comment [IESBA14]: New paragraph Introduction sets out the subject matter addressed within the Section, and introduces the requirements and application material in the context of the conceptual framework. Requirements establish general and specific obligations with respect to the subject matter addressed, including any specific prohibitions. Application material provides guidance to assist in complying with the requirements. How to Use the Code 6. The Code requires professional accountants to comply with the fundamental principles of professional ethics. Requirements 7. The word shall in the Code imposes an obligation on the professional accountant or firm to comply with the specific provision in which shall has been used. Shall is used to indicate a requirement and requirements are designated with an R. Application Material 8. In addition to requirements, the Code contains application material that provides context relevant to a proper understanding of the Code. In particular, the application material is intended to help the professional accountant to understand how to apply the conceptual framework to a particular set of circumstances or a specific requirement. While such application material does not of itself impose a requirement, consideration of the material is necessary to the proper application of the requirements of the Code, including application of the conceptual framework. The entire text of Part A and the relevant Section is required to understand and properly apply that Section. Application material is designated with an A. 9. Where application material includes lists of examples, these lists are not intended to be read as exhaustive lists of all possibilities or circumstances that might arise. Exceptional Circumstances 10. A professional accountant might encounter circumstances in which the result of applying a specific requirement of the Code would be disproportionate or not be in the public interest. In those circumstances, the accountant is encouraged to consult with a professional body or a regulator. 11. A professional accountant might face a situation where compliance with one fundamental principle conflicts with one or more other fundamental principles. In those situations, the accountant is encouraged to consult. Appropriate parties for consultation might include one or more of the following: Comment [IESBA15]: New paragraph Comment [IESBA16]: Comment [IESBA17]: New paragraph Comment [IESBA18]: New paragraph Comment [IESBA19]: Comment [IESBA20]: to.21 Others within the firm or employing organization. 17

18 Those charged with governance. A professional body. A regulator. Legal counsel. The accountant is usually able to obtain guidance on ethical issues without breaching the fundamental principle of confidentiality. However, such guidance does not relieve the accountant from the responsibility to apply professional judgment to resolve the conflict or, if necessary, disassociate from the matter creating the conflict. 12. A professional accountant is encouraged to document the substance of the issue, the details of any discussions, the decisions made and the rationale for those decisions. Additional Non-Authoritative Guidance 13. Non-authoritative guidance is available on the IESBA website ( to help users understand aspects of the Code and comply with it. Comment [IESBA21]: , Comment [IESBA22]: Comment [IESBA23]: New paragraph 18

19 Appendix Comment [IESBA24]: New material PARTS OF THE CODE GUIDE TO THE CODE (ALL PROFESSIONAL ACCOUNTANTS) PART A (ALL PROFESSIONAL ACCOUNTANTS) INTRODUCTION TO THE CODE AND FUNDAMENTAL PRINCIPLES PART B PROFESSIONAL ACCOUNTANTS IN BUSINESS PART C PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE INTERNATIONAL INDEPENDENCE STANDARDS C1 INDEPENDENCE AUDIT AND REVIEW ENGAGEMENTS C2 INDEPENDENCE OTHER ASSURANCE ENGAGEMENTS GLOSSARY 19

20 PART A INTRODUCTION TO THE CODE AND FUNDAMENTAL PRINCIPLES Section 100 Compliance with the Code Introduction to the Code A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. A professional accountant s 11 responsibility is not exclusively to satisfy the needs of an individual client or employer. Therefore, the Code contains requirements and application material for accountants regarding matters that are integral to acting in the public interest The fundamental principles of professional ethics set out in the Code establish the standard of behavior expected of a professional accountant. The conceptual framework establishes an approach which accountants are required to apply to assist them in achieving compliance with those fundamental principles. R100.3 A professional accountant, acting in the public interest, shall comply with the Code. There might be circumstances when laws or regulations preclude an accountant from complying with certain parts of the Code. In such circumstances, those laws and regulations prevail, and the accountant shall comply with all other parts of the Code A1 The fundamental principle of professional behavior requires a professional accountant to comply with relevant laws and regulations. Some jurisdictions might have requirements and guidance that differ from or go beyond those set out in the Code. Accountants in those jurisdictions need to be aware of those differences and comply with the more stringent requirements and guidance unless prohibited by law or regulation. R100.4 A professional accountant who identifies a breach of the Code shall evaluate the significance of the breach and its impact on the accountant s ability to comply with the fundamental principles. The accountant shall also: Comment [IESBA25]: Comment [IESBA26]: New paragraph Comment [IESBA27]: Comment [IESBA28]: Preface Comment [IESBA29]: Take whatever actions might be available, as soon as possible, to satisfactorily address the consequences of the breach; and Determine whether to report the breach to, for example, those who might have been affected by it, a professional body or a regulator A1 Subsections 404 and address a breach of an independence requirement. Comment [IESBA30]: In Part A, professional accountant includes professional accountants in business and professional accountants in public practice, which also includes their firms. Subsection 902 is under development. 20

21 Section 110 The Fundamental Principles Introduction There are five fundamental principles of ethics for professional accountants: Comment [IESBA31]: (c) Integrity to be straightforward and honest in all professional and business relationships. Objectivity to make professional or business judgments without bias, conflict of interest or undue influence of others. Professional Competence and Due Care to: (i) (ii) Attain and maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service, based on current developments in practice, legislation and techniques; and Act diligently and in accordance with applicable technical and professional standards. (d) Confidentiality to respect the confidentiality of information acquired as a result of professional and business relationships. (e) Professional Behavior to comply with relevant laws and regulations and avoid any action that the professional accountant knows or should know might discredit the profession Subsections 111 to 115 set out requirements and application material related to each of these fundamental principles. Subsection 111 Integrity R111.1 A professional accountant shall comply with the fundamental principle of integrity which requires an accountant to be straightforward and honest in all professional and business relationships A1 Integrity implies fair dealing and truthfulness. R111.2 A professional accountant shall not knowingly be associated with reports, returns, communications or other information where the accountant believes that the information: Comment [IESBA32]: New paragraph Comment [IESBA33]: Comment [IESBA34]: Comment [IESBA35]: Contains a materially false or misleading statement; Contains statements or information provided recklessly; or (c) Omits or obscures required information where such omission or obscurity would be misleading. R111.3 When a professional accountant becomes aware of having been associated with information described in R111.2, the accountant shall take steps to be disassociated from that information. Comment [IESBA36]:

22 111.3 A1 The professional accountant is not in breach of R111.3 if a modified report is provided in respect of the information described in R Subsection 112 Objectivity R112.1 A professional accountant shall comply with the fundamental principle of objectivity which requires an accountant to make professional or business judgments without bias, conflict of interest or undue influence of others. R112.2 A professional accountant shall not undertake a professional activity if a circumstance or relationship unduly influences the accountant s professional judgment regarding that activity A1 The existence of threats to objectivity when undertaking any professional activity will depend upon the circumstances and nature of the activity. For example, a familiarity threat to objectivity might be created by a family or close personal or business relationship A2 Examples of safeguards include: Comment [IESBA37]: Comment [IESBA38]: Comment [IESBA39]: Comment [IESBA40]: 120.2, 280.1, Comment [IESBA41]: Supervisory procedures. Discussing the issue: o o With higher levels of management within the firm; or With those charged with governance of the client; Withdrawing from the activity or the engagement team. Ending the financial or business relationship causing the threat A1 Independence is a measure of objectivity both in mind and appearance which is applied in relation to audit, review and other assurance engagements. It enables the professional accountant in public practice to express, and be seen to express, an objective conclusion when performing such engagements A2 C1 and C2 set out independence requirements and application material for professional accountants in public practice. Comment [IESBA42]: Comment [IESBA43]:

23 Subsection 113 Professional Competence and Due Care R113.1 A professional accountant shall comply with the fundamental principle of professional competence and due care which requires an accountant to: Comment [IESBA44]: Attain and maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service, based on current developments in practice, legislation and techniques; and Act diligently and in accordance with applicable technical and professional standards A1 Serving clients and employers with professional competence requires the exercise of sound judgment in applying professional knowledge and skill when undertaking professional activities A2 Maintaining professional competence requires a continuing awareness and an understanding of relevant technical, professional and business developments. Continuing professional development enables a professional accountant to develop and maintain the capabilities to perform competently within the professional environment A3 Diligence encompasses the responsibility to act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis. R113.2 In complying with the fundamental principle of professional competence and due care, a professional accountant shall take reasonable steps to ensure that those working in a professional capacity under the accountant s authority have appropriate training and supervision. R113.3 Where appropriate, a professional accountant shall make clients, employers, or other users of the accountant s professional services or activities, aware of the limitations inherent in the services or activities. Subsection 114 Confidentiality R114.1 A professional accountant shall comply with the fundamental principle of confidentiality which requires an accountant to respect the confidentiality of information acquired as a result of professional and business relationships. An accountant shall: (c) (d) (e) Be alert to the possibility of inadvertent disclosure, including in a social environment, and particularly to a close business associate or a close or immediate family member; Maintain confidentiality of information within the firm or employing organization; Maintain confidentiality of information disclosed by a prospective client or employer; Not disclose confidential information acquired as a result of professional and business relationships to third parties without proper and specific authority, unless there is a legal or professional duty or right to disclose; Not use confidential information acquired as a result of professional and business relationships for the personal advantage of the accountant or for the advantage of a third party; Comment [IESBA45]: Comment [IESBA46]: Comment [IESBA47]: Comment [IESBA48]: Comment [IESBA49]: Comment [IESBA50]: Comment [IESBA51]: Comment [IESBA52]: Comment [IESBA53]: Comment [IESBA54]: Comment [IESBA55]:

24 (f) (g) Not use or disclose any confidential information, either acquired or received as a result of a professional or business relationship, after the business or personal relationship has ended; and Take reasonable steps to ensure that personnel under the accountant s control, and individuals from whom advice and assistance is obtained, respect the accountant s duty of confidentiality A1 The requirement to comply with the principle of confidentiality continues even after the end of the relationship between a professional accountant and a client or employer. When changing employment or acquiring a new client, the accountant is entitled to use prior experience but may not use or disclose any confidential information acquired or received as a result of a professional or business relationship A2 The following are circumstances where professional accountants might be required to disclose confidential information or when such disclosure might be appropriate: Comment [IESBA56]: Comment [IESBA57]: Comment [IESBA58]: Comment [IESBA59]: Disclosure is required by law, for example: Production of documents or other provision of evidence in the course of legal proceedings; or Disclosure to the appropriate public authorities of infringements of the law that come to light; (c) Disclosure is permitted by law and is authorized by the client or the employer; and There is a professional duty or right to disclose, when not prohibited by law: (i) (ii) (iii) To comply with the quality review of a professional body; To respond to an inquiry or investigation by a professional or regulatory body; To protect the professional interests of an accountant in legal proceedings; or (iv) To comply with technical standards and ethics requirements A3 In deciding whether to disclose confidential information in such circumstances, factors to consider include: Comment [IESBA60]: Whether the interests of all parties, including third parties whose interests might be affected, could be harmed if the client or employer consents to the disclosure of information by the professional accountant. Whether all the relevant information is known and substantiated, to the extent practicable. Factors affecting the decision to disclose include: o o o Unsubstantiated facts. Incomplete information. Unsubstantiated conclusions. The proposed type of communication, and to whom it is addressed. 24

25 Whether the parties to whom the communication is addressed are appropriate recipients. Subsection 115 Professional Behavior R115.1 A professional accountant shall comply with the fundamental principle of professional behavior which requires an accountant to comply with relevant laws and regulations and avoid any action that the accountant knows or should know might discredit the profession A1 Actions that might discredit the profession include actions that a reasonable and informed third party would be likely to conclude adversely affect the good reputation of the profession. R115.2 When marketing or promoting themselves and their work, professional accountants shall not bring the profession into disrepute. Accountants shall be honest and truthful and shall not make: Comment [IESBA61]: Comment [IESBA62]: Comment [IESBA63]: 150.2, Exaggerated claims for the services they are able to offer, their qualifications, or their experience; or Disparaging references or unsubstantiated comparisons to the work of others A1 If a professional accountant is in doubt about whether a form of advertising or marketing is appropriate, the accountant is encouraged to consult with the relevant professional body. Comment [IESBA64]:

26 Section 120 The Conceptual Framework Introduction The circumstances in which professional accountants operate might create specific threats to compliance with the fundamental principles. The conceptual framework assists the accountant in complying with the fundamental principles and meeting the responsibility to act in the public interest. It accommodates the many variations in facts and circumstances that create threats to compliance with the fundamental principles and deters an accountant from concluding that a situation is permitted if it is not specifically prohibited by this Code The conceptual framework specifies an approach for the professional accountant to: (c) Identify threats to compliance with the fundamental principles; Evaluate the threats identified; and Address the threats by eliminating or reducing them to an acceptable level. Requirements and Application Material R120.3 The professional accountant shall apply the conceptual framework which involves identifying, evaluating and addressing threats to compliance with the fundamental principles. R120.4 When applying the conceptual framework, the professional accountant shall exercise professional judgment, remain alert to changing circumstances, and take into account whether a reasonable and informed third party would likely conclude that the accountant has complied with the fundamental principles. Reasonable and Informed Third Party A1 The concept of a reasonable and informed third party is a test which involves an evaluation by a hypothetical person. Such a person possesses skills, knowledge and experience to objectively evaluate the appropriateness of the professional accountant s judgments and conclusions. This evaluation entails weighing all the relevant facts and circumstances that the accountant knows, or could reasonably be expected to know, at the time that the evaluation is made to determine whether the accountant complies with the fundamental principles. Identifying Threats R120.5 The professional accountant shall identify threats to compliance with the fundamental principles. An understanding of the facts and circumstances, including professional activities, interests and relationships, that might compromise compliance with the fundamental principles is a prerequisite to the accountant s identification of threats to such compliance A1 Threats might be created by a broad range of facts and circumstances. It is impossible to define every situation that creates threats. In addition, the nature of engagements and work assignments might differ and, consequently, different types of threats might be created. 26

27 120.5 A2 Threats to compliance with the fundamental principles fall into one or more of the following categories: (c) (d) (e) Self-interest threat the threat that a financial or other interest will inappropriately influence the professional accountant s judgment or behavior; Self-review threat the threat that a professional accountant will not appropriately evaluate the results of a previous judgment made, or activity or service performed by the accountant, or by another individual within the accountant s firm or employing organization, on which the accountant will rely when forming a judgment as part of performing a current activity or providing a current service; Advocacy threat the threat that a professional accountant will promote a client s or employer s position to the point that the accountant s objectivity is compromised; Familiarity threat the threat that due to a long or close relationship with a client or employer, a professional accountant will be too sympathetic to their interests or too accepting of their work; and Intimidation threat the threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the accountant A3 A circumstance might create more than one threat, and a threat might affect compliance with more than one fundamental principle A4 Certain conditions, policies and procedures established by the profession, legislation, regulation, the firm or the employing organization can affect the likelihood of the professional accountant s identification of threats to compliance with the fundamental principles. Examples of such conditions, policies and procedures include: Evaluating Threats Corporate governance requirements. Educational, training and experience requirements for the profession. Effective complaint systems. An explicitly stated duty to report breaches of ethical requirements. Professional or regulatory monitoring and disciplinary procedures. R120.6 When the professional accountant identifies a threat, the accountant shall evaluate whether such a threat is at an acceptable level A1 An acceptable level is a level at which a reasonable and informed third party would likely conclude that the professional accountant complies with the fundamental principles A2 The existence of qualitative as well as quantitative factors is relevant to the professional accountant s evaluation of threats, as is the combined effect of multiple threats, if applicable. 27

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